Simulations Plus, Inc. — Q3 FY2017 Form 10-Q
Business context and period. The unaudited quarter and nine months ended May 31, 2017 cover the company’s fiscal third quarter and year to date. Simulations Plus develops pharmaceutical simulation and molecular-property software and provides consulting and contract research services through its Lancaster and Buffalo divisions. The company’s common stock trades on Nasdaq as SLP.
Financial performance
| Metric | Three months ended May 31 | Nine months ended May 31 |
|---|---|---|
| Revenue, 2017 (2016) | $6.75 million ($6.01 million), up 12.2% | $17.87 million ($16.01 million), up 11.6% |
| Gross profit; gross margin | $5.30 million; 78.6% (80.1%) | $13.54 million; 75.8% (77.9%) |
| Operating income; operating margin | $3.10 million; 45.9% (46.4%) | $6.82 million; 38.2% (38.9%) |
| Net income; diluted EPS | $2.08 million; $0.12 ($1.91 million; $0.11) | $4.64 million; $0.27 ($4.16 million; $0.24) |
- Revenue mix and drivers: Buffalo revenue increased 33.6% in the quarter and 20.8% year to date; Lancaster revenue increased 6.1% and 8.2%, respectively. Consulting and analytical-study revenue grew 34.9% in the quarter and 23.2% year to date; software and related sales grew 4.9% and 6.7%.
- Margins and expenses: Cost of revenue grew faster than revenue, reducing gross margin by 1.5 percentage points in both the quarter and year-to-date comparison. SG&A rose 16.3% for the quarter and 13.5% year to date; R&D expense fell year to date, partly because more development costs were capitalized. Net margin was 30.8% for the quarter (31.8% prior year) and 25.9% year to date (26.0%).
- Cash flow: Nine-month operating cash flow was $4.76 million, versus $2.75 million in 2016. Investing used $1.05 million, including $928,000 of capitalized software development costs. Financing used $3.50 million, including $2.59 million of dividends and the final $1.00 million TSRL payment. Cash increased $218,000 to $8.25 million.
- Liquidity and debt: At May 31, cash was $8.25 million, current assets $14.93 million, current liabilities $1.27 million, and total liabilities $4.32 million. The balance sheet reports no borrowing; the $1.00 million TSRL contract payable was paid in April. Management said operating cash flow and existing capital should meet foreseeable working-capital and capital-expenditure needs.
Material changes, outlook, and risks
- Unusual expense: DILIsym acquisition-related costs of $144,000 in the quarter and $261,000 year to date were expensed in Lancaster SG&A. Management estimated these reduced net income by approximately $97,000 and $177,000, respectively.
- Acquisition after period-end: On June 1, 2017, the company acquired all of DILIsym. It paid $4.516 million in cash at closing, including $515,982 of excess working capital left in DILIsym. A further $1 million holdback is payable after 18 months, subject to offsets; earn-out payments of up to $5 million may be payable over three years. The filing says accounting for the transaction was still being assessed.
- Products and commentary: GastroPlus version 9.5 was released in April 2017. Management described continued consulting demand and planned further product development; PKPlus’s next version was expected later in 2017. The filing provides no formal revenue or earnings guidance.
- Dividends: The company paid $0.05 per share in each of November 2016, February 2017, and May 2017. Management anticipated future dividends of at least $0.05 quarterly, but emphasized that each payment requires board approval and may change or be discontinued.
- Risks and contingencies: The company depends substantially on pharmaceutical and biotechnology R&D spending, faces software and consulting competition, and is exposed to customer concentration, fixed-price contract overruns or cancellations, international currency fluctuations, and cyber/data-security risks. It does not hedge currencies. International sales were 34% of nine-month revenue, down from 43.8%. Management reported disclosure controls effective and said it implemented additional remediation measures for previously identified IT general-control weaknesses. A wrongful-death case naming the company was dismissed with prejudice in June 2017; the company incurred no settlement liability.
Investor verification points
- Confirm DILIsym’s post-close financial contribution, purchase accounting, holdback, and earn-out conditions and exposure.
- Track whether revenue growth—particularly consulting growth—supports margins as labor and other delivery costs rise.
- Review cash conversion and receivables: accounts receivable increased to $5.01 million from $3.01 million at August 31, 2016.
- Assess continued dividend capacity after the acquisition and the board’s discretion over future payments.
- Monitor remediation of IT general-control weaknesses, foreign-exchange exposure, and customer and geographic concentration.